Chances are you’ve heard all types of financial advice and wise tidbits from well-meaning relatives since before taking on your first part-time job, but how much of it is true exactly?
Advice to Ignore:
Put 10% of your income in savings. While these words of wisdom seem true enough, the fact is that you need to put away much more.
It’s much better to save 25 or even 30% of your income for retirement. Saving extra now will mean more wiggle room as you get older and need to work through some financial bumps that inevitably come. Only saving 10% won’t cover an unexpected lay off, a much-needed move across the country, changing careers, or even having a baby.
You’ve always heard that it’s better to buy a house rather than rent, but this piece of financial wisdom is also inapplicable today.
Although buying property is an investment, you want to make sure that you will still live in the city you’re in when you buy that first house. Moving to change jobs is much easier when you are renting and you also have more time to build up a good credit history.
Make sure that you can see yourself living at the property for the next twenty years. If not, ask yourself why. Are you buying the house solely to resell it in a couple of years when your career takes you elsewhere? Are you counting on the housing market coming back up, so you can make a quick return on your investment?
Also keep in mind that you never truly own the home that you buy. You will always have home insurance costs, property taxes, perhaps HOA fees and other costs that could end up depleting your savings. With renting, there are usually no surprises and, if there are, you can pick up and move at the end of your lease.
Another common bit of financial wisdom is to start saving for your children’s future when they are still infants. The fact is that college savings plans have drawbacks that other accounts, like a Roth IRA, simply don’t have.
Instead, open up a Roth IRA to keep those investment costs much lower. You can use Roth IRA money for multiple things, including college, so your kids are covered.
Even if you can’t afford to put back money for college, shop smartly as your kids get old enough to fill out those college applications. Look for scholarships and grants where available and take out only enough student loans to cover an affordable college or university. It’s important to teach them the reality of paying back all of the debt they take on, so educate them while they are still in high school with things like prepaid credit cards. If they learn the value of a dollar with prepaid credit cards, they’ll learn the value of choosing a more affordable college program and you can focus on continuing to build your retirement.